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Source: Cityam

The risk of a recession in the US is becoming an increasingly close call, as key economic forecasters reevaluate their predictions in light of easing inflation and continued economic resilience.

While many experts predicted a downturn in late 2022 or 2023, the strength of metrics like housing starts, auto sales and overall GDP growth has given pause. Top forecasters from Deutsche Bank, Nomura Securities and Fannie Mae are softening their recession forecasts, though most still see a downturn as more likely than not.

“It’s getting to be a close call,” said Aichi Amemiya, senior economist at Nomura Securities International. “Housing starts and home prices have been stronger than expected, providing the economy with support. New automobile sales also remain robust.”

Peter Hooper, Vice Chair of Research at Deutsche Bank, credits the Federal Reserve’s aggressive rate hikes for reducing the immediacy of recession risks. By front-loading rate increases, the Fed has helped stabilize inflation expectations, giving it room to ease up on hikes before growth takes a substantial hit.

This analysis is bolstered by the latest economist survey from Bloomberg, in which GDP forecasts were revised upward for Q2 and Q3 2022. The survey also showed moderating predictions for inflation over the next 18 months, indicating the Fed’s policy is working. PCE inflation is now expected to drop to 2.2% by Q4 2024, down from 2.3% in last month’s estimates.

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Soft Landing Hopes Strengthen

Doug Duncan, chief economist at Fannie Mae, encapsulates the shifting consensus. “It’s essentially a toss-up whether we suffer a recession or achieve a soft landing at this point,” he said. “The risks are still tilted toward recession, but the resilience of metrics like housing and auto sales can’t be ignored.”

After four consecutive 0.75% rate hikes, the Fed is widely expected to moderate with a 0.50% increase this week. But traders are split on what comes next. Some believe the easing inflation numbers will allow the Fed to pause rate hikes after July. Others see room for another moderate hike in September before stopping.

September Rate Hike Still Possible

“The Fed is likely to skip September after a July hike,” said Philip Marey of Rabobank in the Bloomberg survey. “The next opportunity in November will likely take place against the background of a recession, as real rates become more restrictive. Therefore, we do not expect the second hike in the dot plot to materialize.”

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On the other hand, Deutsche Bank’s Hooper believes there’s space for a September hike before a pause. “The rapid rate hikes have helped stabilize inflation expectations, giving the Fed flexibility,” he noted. “We could see another 0.50% hike in September before they take a breather.”

This spectrum of opinions underscores the increasing uncertainty around recession forecasts. The cooling of inflationary pressures is providing hope that a soft landing can be achieved. But economists remain cautious, noting that the full effects of the Fed’s rate hikes are still rippling through the economy.

Recession Risks Remain

“Make no mistake, the risk of recession is still elevated,” said Nomura’s Amemiya. “Higher interest rates have a lagging impact, and the labor market remains extremely tight. Downturns are challenging to predict, but we’re monitoring risks closely.”

While Q2 GDP figures far exceeded expectations, early forecasts for Q3 and Q4 growth remain weak. And the Fed has made clear it will continue raising rates, potentially even into restrictive territory, to ensure inflation is on a long-term downward trajectory.

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This leaves the US economy balanced on a knife’s edge. Strong consumer and business fundamentals are providing optimism. But tightening financial conditions and Fed policy pose challenges in the coming months.

Maintaining Growth Momentum

For the soft landing scenario to play out, the economy will need to maintain momentum across metrics like consumer spending, business investment and hiring. Moderating inflation expectations may ease pressure on households and companies, but risks remain.

“The path to a soft landing is narrow,” Duncan emphasized. “But recent data indicates it’s still possible with the right monetary and fiscal policy mix. Much depends on the inflation and jobs reports over the next few months.”

The takeaway is cautious optimism. Cooling inflation indicates the Fed’s policy is taking effect, and underlying economic strength may allow for a soft landing. But volatility and uncertainty are likely in coming quarters, making recession forecasts a very close call.

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